Business RX: Advice on improving or starting a business

May 21, 2013

Elana Fine, managing director of the Dingman Center for Entrepreneurship at the University of Maryland's Robert H. Smith School of Business, will take your questions. This week, she is joined by special guest Kevin Lenane, an entrepreneur who leads video indexing company Veenome. Together, Fine and Lenane will offer advice on raising capital, luring customers, scaling a business, and any other entrepreneurship topics.

Veenome exists solely to be acquired, having never made a profit. What do you think of the practice today of creating companies knowing full well you have a three year window to be bought out or shuttered?

A: Kevin Lenane

Nice aggressive opening statement! However your information is innaccurate as Veenome is a b2b company - and our KPI (key performance metric), so to speak, is revenue. We do not exist solely to be acquired and in fact have been turning revenue for almost 9 months. At some point this summer we will turn profitable and be well into the 6 figure revenue range per month.

But on to your actual question. I think the practice of building a company solely to be acquired is tough bccause an acquisition is based on a moment. Like at this moment, Yahoo bought Tumblr, but it's not as if the founder of Tumblr had this 5 year plan and Yahoo was at the end of it. It's too hard to predict these point events - people try to, but it's not practical. I would say that if you are keeping a specific acquisition in mind as you create a company and raise money, you drastically raise you odds of running out of money because you haven't build a business that can last. It's basically been built to end in a single point and a million things happen outside of your control in between the point of start and that point perceived that make this outcome super-unlikely.

I'm going to go with Kevin on this one -- I think the "watched pot doesn't boil" cliche applies here. If you spend all your time thinking about the acquisition -- you won't ever grow a customer base or create value for the acquirer. That being said, there are some technology companies where once the technology is built, it doesn't make sense to scale a larger manufacturing and sales organization and the founders might look to exit before they even start to build a business.

I have full-time job with a fixed income and benefits. If I start my own business, I lose that fixed income and benefits, so I have the potential to make a lot more or a lot less. I have an idea of what I can charge clients, but no guarantee the pipeline will be as full as I would need it to be. I don't really know all of the potential expenses. How can I compare a known income with a potential income?

A: Elana Fine

Best thing to do is to talk to others in the field to understand the startup expenses, customer acquisition costs and sales cycle. Next start talking to customers -- would they pay for your services? How much? How often? See how much of a pipeline you can line up before you think about leaving your job. See if you can do a few pilot engagements while you still have a paycheck. Get as much information as possible to de-risk - and then determine the jumping off point.

I'd be interested to hear Kevin's thoughts on this...crowdfunding comes up a lot on these chats. It has pros - great access to larger pool of capital, visibility for your startup, etc. However, it will be interesting to see how the batton passes when startups go to raise follow on capital. Often gets hard to chase down investors, etc. and companies might end up with complex cap tables that are less appealing to VC investors. You could also end up with unsophisticated investors who don't understand the inherent risks of early stage investors.

I think crowdfunding works really well for hardware startups right now. If you want to demonstrate traction on product sales before a product is built, there is no better way to do it than Kickstarter. I think generally crowdfunding like Crowdfunder.com is really exciting too, but those platforms arent quite fully laid out yet. If I were a software entreprenur and wanted to use crowdfunding, I'd consider using it as soon as the first platforms launch before the bad actors get on there.

I think the risks are basically uneducated investors feeling like they've been "burned" and not understanding the incredible riskiness of the startup investment market.

How is raising the initial round of funding different from raising subsequent rounds?

A: Elana Fine

Each round has its own "personality" but I think raising your initial round is a good market test. Typically companies have raised $$ from friends and family who might be easier to sell because of the personal relationship. Building interest and trust from strangers, who have a lot of deals to choose from, is an important milestone. That being said -- that group is going to have much higher expectations and their impression of you as an entrepreneur will have a significant impact on future rounds. Kevin probably has a good perspective on this given the stage of Veenome.

Kevin, what has been most surprising about running your own startup? What was harder than you expected?

A: Kevin Lenane

I'm surprised at the impact that being a founder has had on my energy/attention. If you are really in it for the long haul, you can't put your business away when you get home, go on vacation, go on a bike ride, etc. It's always in a lobe somewhere - and this effect on your energy is pretty major. If you believe in what you are doing, though, it is tolerable. I honestly can't imagine doing a startup that I didn't believe in - I think the psychological impact of that would be very severe.

I noticed from your background that you have worked with startups before, what did you learn from your previous startups that you've applied to launching Veenome?

A: Kevin Lenane

The biggest takeaway from the last startup was on the biz dev side. At PointAbout we were constantly the smaller company/vendor working with the very large company. The sales cycle is pretty long for larger organizations and I've trained myself to keep a seemingly overwhelming amount of prospects on the burner since we never know when one is going to hook. At any one time you really only have to truly focus on a few and just keep others warm.

It seems obvious, but I think startups get overly focused on one or a few big dollar clients and this can spell doom if you are b2b with a long sales cycle. You simply run out of whatever cash you've raised.

Can you walk me through pre and post-money valuation analysis? My company is worth $1M, and we are looking at raising $1.5M. Also, the investors want to do a convertible note instead of equity? I am confused. Do I need a fancy expensive lawyer??

A: Kevin Lenane

I guess my question would be: How did you get the 1M number? Early stage valuations are just like a dartboard I think in D.C. you can pick some number, say $3M or $2M and just go with that. If it seems like you are getting pushback, then adjust. The key is to pick a valuation where you don't give away half the company but also so the round goes quickly. If you put your premoney valuation at $20M, it feels nice, but you'll be raising money for a while. Also if your valuation is too high, you pigeon-hole yourself. If you raise on a $20M premoney valuation - then for your investors to get a 5x return you have to sell for $100M, which is so rare and hard to predict.

Anyway just pick a valuation and keep moderately flexible.

Converting debt is just easier in early stage and the docs are cheaper. I would suggest a lawyer but the good ones will do cheap rates for good early stage company. Cooley is a great local option.

I met an investor who was interested in my product. We've had 3 meetings since my initial pitch, but I can't seem to get him to commit. What are some tactics I can use for "closing the deal" with investors?

A: Elana Fine

Sometimes investors feel bad about saying "no." I can't really explain this phenomenon, must be how they get the "angel" title. Think of this like a sales process -- at some point you need to ask for an answer. If there is hesitation, find out what information the investor still needs to know or if they want to wait for additional milestones. At the early stages, the investors sometimes just know in their gut when they want to write a check. The "maybes" are always the hardest because they are worried they are going to miss the next big deal so they are just waiting for some sign to make a decision. Don't spend too much time unless they give you some specific metrics for follow up. It is like that movie "He's Just Not That in To You." If they don't call, email, tweet back then the timing/fit is probably not right.

I'd also also say if you think you will probably get a no - don't pursue the discussion any further. An investor is more likely to come back after 6 months of "waiting" then reverse their no. Use your intuition and if you think it's a no after 5 unanswered emails, wait it out and swing back when you have more traction...

You mentioned that you were suprised how much mental bandwidth your startup takes -- how have you found early employees that are equally passionate about the business? How do you get them to be thinking about it all the time?

A: Kevin Lenane

I'm not sure you can find anyone that thinks about it quite as much as the founder, but I think you basically interview carefully and make it worth their while in the long term by giving them plenty(whole number integers) of equity and be successful. Grow the value of those options you give to your employees over time and they will have extreme interest in long term success.

As someone who is so connected to the startup scene, you must have insight into recently launched startups. What are some of your favorite up and coming startups? What do you look for?

A: Kevin Lenane

Oh there are a couple new ones that I love:

Atlas Wristband - it's like Fitbit for every other exercise besides walking. The prototype is pretty incredible and can tell you how many pushups you are doing or how you swing a golf club. A group of recent Hopkins engineers built it and are raising seed now.

TrackMaven - Allen Gannett's new company that helps track competitors.

I am a co-founder of a tech startup, and my team is considering relocating to the West Coast when we are ready for venture capital, as we heard that raising funds there is much easier than in the Washington area. What is your take on that?

A: Elana Fine

It is true there aren't as many VC firms in D.C. as the west coast...but there also aren't as many startups (yet). There are a lot of very smart and well capitalized VCs here that are looking for deal flow and often go out of the region because they don't see enough. I'd say a couple things. 1.) The streets of Silicon Valley aren't paved with gold - You still need to find the right fit and there is a lot of competition. 2). You don't need to relocate the company to raise money. You might get a lead investor here or vice versa, but your business is better here in the D.C. area due to sector expertise. 3.) Make sure to listen to the feedback you get from local VCs -- there are a lot of smart people here who might have sound advice and are interested in watching your company.

I'd diverge from Elana a little here. It does depend a bit on what you are doing. I'll tell you it's very popular to talk about how hard it is to raise money in D.C. However, until you've talked to 50, or even better, 100 area investors, you can't really offer a valid opinion because that's really how many you talk to when you first start. The statement sometimes serves to self-fulfill for the entrepreneur, so I'd be careful how much that gets said.

That being said - if you are doing something overtly consumer-oriented - then you wind up having a harder time in D.C. just because generically angels here have less experience with that. This manifests itself in the founder having to do lots of education in their pitching, which slows the process down and creates problems. I think it can be a good idea to go out to the West Coast if you are going to be heavily consumer Web, but you should be aware that you open yourself up to a hell of a lot more social networking for everything when you are out there. Investors see more noise out there then any place in the world, so it can be hard to get their attention as well.

My partner and I are talking about opening a restaurant. He and I both plan to contribute the same amount of money into the venture. The question is how should we divide ownership of the company? My job will be cooking and all operations, and his job is more on the business side -- keeping the books, marketing, etc. Are there any guidelines on how to go about it? Thank you!

A: Elana Fine

I think it is more about how you want to run the business and make decisions -- seems to be that you are equal partners in the startup. The success of a restaurant (particularly profitability) is just as much a function of how well you run the business, manage expenses, etc. as it is how good the food tastes. Go Dutch -- sounds like a 50/50 split to me :)

There has been a lot more emphasis in both the academic world and the start-up world on the "lean start-up" methodology. How do you define that practice and does it work?

A: Elana Fine

The rise of the "lean startup" is a unique occasion where academic studies on successful startups have led people to rethink how to approach their businesses. We see a lot of companies focused on putting out a minimal viable product - test quickly and then iterate. We are actually encouraging companies to think about customers and customer discovery even earlier -- talking to potential customers before you build so you are building the product closer to customer specs/pain points.

As a startup, it's hard to incentivize your team to perform well when progress is slow and cash is low. How can I keep my team motivated, positive, and believing in the company?

A: Kevin Lenane

Well - I'd definitely reward them with equity. This is hard - you just have to lead by example. I think it's less about events and more about proving that you are always in it and there. It's a cliche, but lead by example and not by talking.

Elana Fine was appointed Managing Director of the Dingman Center in July 2012, after joining the team in 2010 as Director of Venture Investments. As Managing Director, Elana's primary focus is leading the Dingman Center in support of its mission and strategic plan. Key responsibilities include oversight of our student venture incubator, Dingman Center Angels investor network, business competitions, and technology commercialization efforts. Elana earned an MBA in Finance and Accounting from the University of Chicago's Booth School of Business in 2002, and earned a BS in Finance, from the University of Maryland, College Park, in 1997.

Kevin Lenane

Kevin Lenane is the CEO of Veenome and has helped lead the video indexing company to over 50M video views indexed/month. The company won the Paley Center's "Next Big Thing," BB&T Entrepreneur Invitational 2012, and was named one of the three hottest startups of SXSW2012 by CNET. Veenome raised 1.4M in seed capital with investors from Google, Tesla, Chegg, and EcosystemVC. VA.
Lenane's previous experience includes product management and business development at Socialize/Appmakr/PointAbout, NAVTEQ and Nokia. He is a veteran of three acquisitions and was legal key in 2011 PointAbout acquisition.